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Telus & Mobilicity: Why competitiveness hangs in the balance

A woman uses a mobile device while walking past a Telus store in Ottawa February 19, 2014. REUTERS/Chris Wattie

The third time may not be the charm for Telus, but it could be the beginning of a major split in telecom industry direction between Canada and the U.S.

Reports that the company is withdrawing its latest offer to take over struggling wireless operator Mobilicity cap a protracted effort by Telus to integrate Mobilicity’s subscribers and take over its spectrum. Telus first offered C$380 million for Mobilicity last May, only to scuttle the deal after the federal government rejected it, saying it violated the 5-year moratorium on transferring spectrum acquired during the 2008 AWS auction – a clause designed to encourage competition by giving new entrants sufficient breathing room to grow before the incumbent carriers could attempt to acquire them.

After a second offer by Telus met a similar fate in October, Mobilicity filed for creditor protection under the Companies’ Creditors Arrangement Act (CCAA). Telus had better luck with Public Mobile, whose G block frequencies were not subject to the moratorium, when Ottawa quickly approved its takeover bid in October.

Telus took another run at Mobilicity, the customer-facing brand of Data & Audio Visual Enterprises (DAVE) Wireless, last month with an updated $350 million bid. Its latest, and apparently final, decision to walk away is likely closely related to Industry Minister James Moore’s threat last month to deny Telus permission to participate in next year’s 2.5 GHz spectrum auction if it persisted with the deal.

4 players or bust

The federal government has steadfastly clung to its goal of encouraging wireless competition, preferably through the formation of a fourth national carrier. Although Videotron sparked hope that it would assume that role after it successfully bid on 700 MHz spectrum in parts of Ontario, Alberta and British Columbia, it could take years for the Quebec-based operator to assume anything remotely approaching a national presence – if indeed it ever does. The collapse of the latest Telus offer further stymies Ottawa’s fourth-carrier quest, as all three new entrants following the 2008 auction have now hit the skids.

Public Mobile’s integration into Telus starts this month and will be complete by August when the last of its remaining subscribers are transitioned to the national carrier’s network. Wind Mobile failed to gain investor approval to purchase additional spectrum and subsequently opted out of this year’s 700 MHz auction. Its primary backers, VimpelCom Ltd., took a $768 million writedown in March, essentially reducing Wind Mobile’s value to zero.

It’s easy to see why Ottawa was so opposed to a Telus-Mobilicity hookup, as it would have prevented a possible merger of the smaller, weaker players into a more viable fourth option. With the Telus offer now off the table, Mobilicity is bleeding subscribers – currently at 165,000, down from 250,000 a year ago – and has no known suitors in the pipeline. Assuming its trajectory continues unchanged, its failure would return the Canadian wireless landscape to where it was six years ago.

U.S.-Canadian divergence

While Ottawa’s successful blockage of the Telus deal maintains a glimmer of hope for its efforts to encourage additional players to enter the market, it stands in stark contrast to the current telecom consolidation trend south of the border. Comcast’s US$45 billion buyout of Time Warner Cable Inc. and AT&T’s $48.5 billion deal for DirecTV will solidify their already-dominant multiplatform subscriber bases and reinforce the advantage of massive scale at the expense of consumer choice. It has longer-term impact for Canadians, as well: Once the major U.S. carriers are finished tying up with each other, they’ll inevitably look north to fuel future growth.

Industry Canada’s changes to foreign investment rules, first announced in 2012, would likely prevent an immediate massive-scale buyout by a U.S. conglomerate. But the American carriers’ end game – scale at all costs – could ultimately make Industry Canada’s dreams of encouraging an organic move toward a fourth national carrier moot. With that in mind, the rules for next year’s 2.5 GHz auction, and any future spectrum selloffs, will continue to evolve as the battle for Canada’s wireless future heats up.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own.